Most businesses will always have a funding need. Whether they’re setting up the venture, fuelling growth, covering a significant expense, filling a gap or improving cash flow, having access to finance is crucial.
Due to the various requirements a business may have – and sometimes all at once – it’s rare for one funding solution to do the trick. You will need to consider multiple streams of finance that allow you to meet your objectives, improve cash flow and build resilience. A funding mix is critical.
This blog explores how to combine funding types, why it’s beneficial and how to get the balance right.
Why should you mix funding?
There are many benefits to mixing funding types.
Firstly, it will increase your overall funding level. While one loan might only give you a set amount of capital, pooling funding sources together enables you to access larger sums by maximising funds from each.
It is also helpful if you are limited in the amount of funding you can raise from one lender. By approaching alternative options, you will top up your funding and explore options that better suit you. It will also allow you to still meet your goals.
Different funding types address different needs. By mixing funding types, you will address the various gaps in your company with focused solutions.
Another advantage of mixing funding types is that it allows every part of your business to work for you. Some forms of finance are compatible with specific to assets or sales within your business, for example:
- Trade finance is used to fund imports and exports if you utilise either
- Stock finance raises finance against your unused inventory
- Invoice finance unlocks capital in your unpaid customer invoices
By understanding these finance types, you can unlock capital across them and fuel your funding power.
Finally, mixing funding from external sources allows you to diversify your risk level. Rather than taking on a high level of debt with one provider, you will spread the debt among multiple sources. If there is an issue with one funding stream – for example, you default on payments – you only need to address that avenue rather than putting your whole financial provision in question.
Remember to review your affordability for any funding you use to ensure it won’t harm your financial health and stability.
7 tips for getting the funding mix right in your business
Have a cautious strategy in place
When mixing funding types, you shouldn’t aim to get financing wherever you can. Doing so may lead to you having too many funding streams open with too many lenders, which could ultimately overwhelm your finances and may harm your credit rating.
Where possible, aim to build relationships with a few key financial providers. If you combine financial types (for example, working with debt lenders and equity investors), it’s even better as the way they obtain their returns is different, easing the pressure.
In the case of debt funding, if one lender will provide you with the financing you need, it is best to utilise them as it minimises the fees and interest you need to pay compared to having multiple smaller loans. This is unless you are sourcing different funding types, such as commercial loans, invoice discounting, trade finance, etc, where specialist lenders may be the better option.
Search for applicable grants
Grants are a valuable addition to your funding mix, as they offer sizeable funding that does not require repayment. This means there is no pressure on your finances.
Research grants that may be relevant to your business, including those from the government, industry bodies or local institutions. Grants are usually very scarce and specific, so it might be hard to find one. If you do, it’s always worth applying.
Don’t forget internal funds
Many owners will invest their own money into their business. It is a staple part of your funding mix and may help fill gaps.
While it is common to put personal reserves into a business or even ask family and friends to support you, don’t rely on it. If you aren’t careful, it will affect your private life, put you in debt or even cause relationship damage.
You should also aim to pay yourself a decent wage to recoup the costs and protect your personal life.
Bear your needs in mind
As part of your sensible funding strategy, it is crucial to understand your needs and find compatible solutions. It means working with funders whose eligibility criteria you meet (including being able to afford repayments) and checking they will not have any detriment on the long-term running of your company.
By spending time searching for options that suit your needs, you increase your chances of being accepted for funding and ensure the future success of your company. It will also eliminate any issues associated with your funding mix that could cause problems later.
Work with a professional
Mixing funding types may get complicated, especially if you aren’t sure of the options that will work best for your business. Working with a professional will give you access to expert guidance that makes things easier.
A commercial finance broker or advisor will identify appropriate routes based on your needs and goals and help you through the application process. They will also support you in creating a broader finance strategy that offers the right mix of funds and brings results.
Don’t be afraid to mix debt and equity
As we have already touched upon, having too much debt in a business can be a recipe for disaster, putting a strain on your finances.
If you already have debt financing in place, but it isn’t quite delivering the results you need, it may be worth considering equity instead of additional debt.
Unlike debt options, equity usually does not require repayment, which eases the strain. Instead, you will need to relinquish part of your business to your investors in the form of shares. This does mean they may have a certain level of say in any business decisions, which you should be comfortable with before you commit.
Equity solutions are also a great way of generating larger sums, which could be welcome to enterprises with grand growth plans and help you top up any funding you already have. If you find an investor with expertise in your industry, then you may also benefit from mentoring.
If you do choose to pursue equity as an additional lever of finance, they will want to know about any loans or other debt funding associated with your business, as this may affect their interest or willingness to purchase shares. Similarly, if you are pursuing debt options, many lenders will ask for shareholder information before they make an offer.
Check terms and conditions
Some funding streams may not be compatible with one another. This isn’t just in terms of the impact on your business but also in the legality of any existing arrangements you have set up. For instance, if there is already a charge over your business, will the existing lender agree to a new charge being registered?
By taking on additional finance commitments, you may not comply with the existing banking covenants that exist. Non-compliance could lead to the withdrawal of funding and a legal minefield, which could make future searches for funding much trickier.
As such, it is essential to understand the terms and conditions of any loan or agreement you have in place. Ideally, these should be checked before you commit. If you already have them in place, you should revisit the fine print to check everything is compliant.
Most lenders will allow you to access several funding streams at once. You may be aware of one or two of these, but a depth of knowledge is crucial to get this right. Otherwise, you risk stumbling into legal complications despite your best efforts. This is where you should seek professional help when considering accessing new funding.
Conclusion
In an ideal world, you would be offered precisely the right amount of funding on the exact terms you need – but this is the reality for very few enterprises, and blending solutions often becomes necessary.
If you are utilising various funding sources at once, doing it carefully – following the advice outlined above – will enable you to get the most value and avoid overwhelming your company, both financially and legally. Aim to find options that work together, so you get the benefits from each type. It will also enable you to address the changing requirements of your business through solutions that flex with you.
If you need support in understanding the routes available to you and combining the right solutions, we are here to help. Our team of advisors have expertise across different funding types, allowing us to find the perfect mix for you.